The envelope budgeting strategy is actually very effective. It might seem like the most primitive way of budgeting your finances but its simplicity is actually what makes it effective. While using apps and relying on technology may seem to make things more convenient, it can sometimes be confusing. It might work for some people but if you find yourself lacking the enthusiasm to use them, you might want to use another and more simple option. The important thing is that you never stop budgeting.
Back in 2013, almost 1 in 3 Americans make use of a detailed household budget. Whether it is a written or computerized budget plan, it is evident that only a few tracks their income and that various expenses they make. It is not clear why the majority do not create a budget plan. Despite the financial difficulties we had to go through during the Great Recession, people still choose to forgo this simple task. A budget plan is one of the basic tools that you need to manage your finances well. It seems like a simple concept, monitoring your income and expenses, but it can help you take full control of your finances.
If it seems like budgeting is a tedious process, then just opt for the simplest one – the envelope budgeting strategy. You will be thankful that you have made the effort to budget. It can help you survive unexpected pay cuts or emergency situations.
How to start an envelope budgeting system
Starting a budget plan is not really that complicated. You just have to make sure that you are truthful and realistic with it. Sometimes, people create very strict budget plans in hopes that they can reach their target savings immediately. While this is admirable, you will most likely falter in your budgeting efforts. If it makes you miserable, you will soon give up on budgeting your money. That is never a good sign.
This is why the envelope budgeting strategy might be the best course of action for you. This type of budgeting technique will force you to use cash. If you want to curb your spending, you need to try a cash budget. It is not only simple, it is also easy to manage. Here are the simple steps that you need to follow in order to set up an envelope budget plan.
Determine the spending categories you want to pay in cash
Start by identifying the categories that you can pay in cash. Admittedly, there are expenses that you cannot pay in cash – like your mortgage and most debt payments. Usually, the expenses that you can switch to cash are discretionary expenses. These include food, groceries, transportation, entertainment, clothing, and other house-related expenses. While household budgets vary, these are the general list of expenses that you can exclusively use cash for. Once you have the list, you need to set a specific amount for each category.
Get envelopes and label them
Now that you know the expenses that you can use cash on, you need to get the envelopes and label them accordingly. Get plastic envelopes that you can use repeatedly. You want it to be sturdy enough to withstand regular handling – since you will be holding it from time to time. Make sure you indicate the amount of money that you will budget for every category. You want the amount to be clear so you know how much you can spend. Place these envelopes in a safe place.
Schedule when you will withdraw cash
Since the envelope budgeting strategy uses cash, you obviously need to set a time when you will withdraw it. Get the total amount that you need to withdraw and schedule when it will be taken from your account. Some people prefer to get it at the beginning of the month while others want to get it twice a month – or every time a paycheck arrives. Feel free to schedule it according to the arrival of your income. Once you have the cash, place the appropriate amount in every envelope.
Plan major shopping errands
When all your envelopes are filled, you can feel free to use these for the various expenses that you will make within the month. You need to take the envelope with your whenever you shop so a little bit of planning is in order. What is great about all the planning is the fact that it will help curb overspending. According to reports, impulsive spending can reach up to $5,400 annually. This is money that you can save because you will learn how to plan your expenses. If it is not a planned expense, you will not bring your envelope – thus depriving you of the means to pay for the purchase. With no money, you will not spend.
All of these will help you get started on the envelope budgeting strategy. As you can see, every step is actually very simple. If you do it correctly, you will find your finances in a stronger position. It does not matter if you are earning a small or big income. You can be successful as long as you know how to manage it well.
Benefits of using the envelope budgeting system
The envelope budgeting strategy is actually perfect for people who are always overspending and going beyond their budget. If you want some help with money management, you need to give this strategy a try. There are many benefits and you will find three of them below.
Forces you to stick to your budget
When there is no more cash, you stop spending. It is as simple as that. The envelope budgeting strategy forces you to stick to the amount that is in your budget. Whatever cash you place inside the envelope is what you are allowed to spend. When it runs out, you stop spending. That effectively makes you stick to your budget plan.
Allows you to control your spending
Spending cash is harder to do. When you use credit, you do not feel the pain of parting with your money – simply because the financial exchange is not something that you can physically see. This makes it easy to overspend. And when you overspend, the excess is usually considered as borrowed money. This is actually more common than we think. In fact, it is revealed that Americans are prone to borrowing more than saving – thanks to their spending habits. You want to make sure that you do not give in to the temptation of this consumerist society. Sticking to your envelope is one way to shield yourself from overspending.
Easier to reach your financial goals
Since you are sticking to your budget, you are most likely to reach your financial goals. Your spending is controlled after all. It is easier for you to save more money to reach your target. Not only that, the cash in your envelope, whatever is left can either be rolled over to the next shopping errand – or added to your savings. Both will equally feel gratifying for you.
As you can see, the benefits of the envelope budgeting strategy can really help improve your financial position. If you are looking to improve your personal net worth, you need to have a budget. In case you are overwhelmed by it, just keep it simple. Use cash and automate those that you can. That way, you will not miss any payments and you are sure that every expense is controlled and always funded.